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Mastering the Art of Contract Negotiation, Part 1

How many times have you walked up to someone, introduced yourself, and held out your right hand to receive or offer a handshake? We all do it without thinking about the original significance of the handshake, but it is more than a greeting.

The handshake has its early history in business transactions where contracting parties shook hands to seal a deal. The Uniform Commercial Code (UCC) has much to say about the efficacy of handshakes as related to contract validity. The UCC is a set of statutes adopted in some form by 50 states, and it governs business transactions among merchants and consumers. In Georgia, for example, you can still form a General Partnership on a handshake.

This article and the next in the series will look at best-practices for contracts and negotiations to help the contract writer or negotiator produce the most comprehensive and favorable results. We will not attempt to define what a contract is nor present step-by-step negotiating techniques, as both of these will vary widely by the nature of the contract subject matter and the parties involved.

From a simple handshake to a multimillion-dollar, long-term, multinational, highly conditioned transaction, the procedures for putting an enforceable agreement into place and the communication between or among parties share very common practices. The basic practices are independent of the value and explicit content and terms in the agreement. The skillful work of a contract writer and a negotiator can save or earn the company significant value in terms of dollars, reduced liability, enhanced reliability, and indemnity against non-performance.

Approaching this subject from either side, the person or company that makes the offer (or contract) and the person or company that receives the offer or contract, what follows are the practices that should be observed when entering into face-to-face negotiations.

The pre-meeting
You should arrange a meeting with all the department representatives who will be affected by the terms or content of this contract. If your company originated the contract or if the visiting company sent you a copy of its contract, then you want to be sure that everyone attending the actual negotiation meeting has received and read the contract in its entirety. Now is the time to get everyone's feedback on what they have read.

Any materials you intend to display or distribute during the negotiations should also be reviewed by the pre-meeting group. Check everyone's calendar for availability and have designated backups in case of unanticipated absences.

In the meeting, you will want to discuss things like bottom lines for pricing, delivery schedules, penalty clauses, warranties, grace periods for performance, first article approvals, IP, items upon which you cannot compromise, who needs to be in the active negotiations and what each person's key role is, any creative or unique negotiating strategies you may want to try, and what your competition can do as a potential response to your bottom line terms.

In this meeting, you will want to give an overview of the other company's products and individuals, including the company's standing in the marketplace, so that everyone in the active negotiation will be fully informed going in.

At the end of this company review, everyone will have a better understanding as to the strength of your company's negotiating position. For example, if you are working with a company that provides a product you desperately need, and no other company makes that product, then your negotiating position might not be as strong as you would like it to be. And, if their company “doesn't need your business,” then your position becomes even weaker. You don't want some hotshot member of your negotiating team blurting out something like, “We can just take our business elsewhere.”

A company knows if it's the only one offering a product, so you shouldn't make any allusions to having an alternative solution — unless you have a backup re-engineering plan ready to go! They will have investigated their own marketplace and have come to the table knowing they are unique. They will know your only alternative is to go back to the design table and that it will cost you more time and effort than giving up a price point or two on the contract.

In the second and concluding part of this article, I will review what happens at the actual contract negotiation and how you can achieve your corporate goals without breaking the bank.

9 comments on “Mastering the Art of Contract Negotiation, Part 1

  1. Houngbo_Hospice
    February 2, 2012

    “They will know your only alternative is to go back to the design table and that it will cost you more time and effort than giving up a price point or two on the contract.”

    Right, it is essantial that you know  the strengh of the party (or company) you are entering a contract egreement with. But it is not because a company is the only one offering a product that it should we should let it impose a price point that you cannot afford. 

  2. dalexander
    February 2, 2012

    Hospice,

    Agreed! I would be interested in hearing from you when Part 2 comes out. This is a kind of subject matter we could all stay up late into the night exchanging both funny and tragic stories of real world experiences in the conference room.

  3. Ms. Daisy
    February 2, 2012

    Yes, good  stuff! I look forward to Part 2 and beyond.

  4. Barbara Jorgensen
    February 2, 2012

    Douglas–you aptly called this an art. As much as travel has become so time-consuming, there is nothing that will replace eye contact, face to face negotiation and a handshake. It's unfortunate the deals have become so complex that they require more than a handshke, but we all know the dangers of not having something in writing.

  5. Ariella
    February 3, 2012

    @Barbara “An oral contract isn't worth the paper it's written on” is a famous adage attributed to Samuel Goldwyn. It may be legally binding, but it is hard to prove the terms if there is no written record. 

  6. Houngbo_Hospice
    February 3, 2012

    @Douglas,

    Thanks, there is certainly much more to say about the topic. In part two, if you can give examples of real-world case studies, that might be interesting as well. 

  7. dalexander
    February 3, 2012

    Hospice, Part 2 is already written and talks more of the logistics of the meeting. However, this venue of article and response is perfect for examples from everyone. How many people have T&Cs in tiny print on the back of their standard everyday POs? with programs like QuickBooks, the POs are very basic and one sided. Has anyone modified a standard PO to include all the contract verbiage, or have you just referred to the T&Cs as attachments?

  8. dalexander
    February 3, 2012

    Hospice, Case studies are great learning tools and if you could organize a training session with your Purchasing group, you could set the stage for negotiating Role Play. For those on your team, you may want to teach them about potential problems that come up during negotiating, and then role play the actual situation and look at the creative responses and best solutions for those difficult situations. Barbara was right that negotiating is a kind of business art form so that means when you are off camera, you can have some fun with it.

  9. elctrnx_lyf
    February 7, 2012

    Definitely a useful article to understand what to prepare for a meeting with the suppliers while providin them new contracts. Surely I'm looking forward for the 2nd version of this article to understand more tricks.

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